The Office of General Counsel issued the following opinion on December 2, 2004, representing the position of the New York State Insurance Department.
Re: Commission Added to Ocean Marine Net Premium
Under the facts presented, would the inclusion of the broker's commission as part of the gross premium violate N.Y. Insurance Law § 2119(c)?
As presented, yes. See analysis below.
The inquirer asked whether ABC, an excess line insurance broker, could attach its commission to an ocean marine cargo policys net premium. The inquirer explained that he received a cover note for an excess line insurance policy from a London broker stating as follows:
Premium: US$15,000.000 minimum and deposit adjustable @ 0.06% on total annual shipments. Nett [sic] to US broker with permission for US broker to add commission to premium.
The inquirer also provided a copy of ABC's proposed cover note, which does not include the above language. ABC's provisional cover note states:
Premium: US$22,000.00 minimum and deposit adjustable @ 0.086% on total annual shipments.
ABC's figure is a "gross premium" that combines both the original net premium and the broker's commission within one figure. The inquirer indicated that the insured would only see ABC's version of the cover letter in the event that the policy is ultimately issued.
New York Insurance Law prohibits an insurance broker from "receiving any compensation, other than commissions deductible from premiums on insurance policies or contracts from any insured or prospective insured unless such compensation is based upon a written memorandum, signed by the party to be charged and specifying or clearly defining the amount or extent of such compensation." See, N.Y. Ins. Law § 2119(c)(1) (McKinney 2000) (emphasis added). A plain reading of § 2119(c) does not support the proposed action. Specifically, § 2119(c) states that a broker is prohibited from "receiving any compensation, other than commissions deductible from premiums on insurance policies or contracts from any insured." Id. Based on the inquirer's description of the proposed activity, it appears that the commission is not deducted from the premium amount. Rather, it appears that the commission would in fact be added to the net premium in direct contravention of the "deductible" requirement as set out in the above cited statutory language. Id.
In addition, nowhere within ABC's proposed cover note is there an express statement of the broker's commission fee, nor will it be signed by the insured. As such, in its present form, ABC's provisional note would violate N.Y. Ins. Law § 2119(c)(1).
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.